Despite policy uncertainty, the U.S. economy is set for another year of expansion
2024 was another impressive year for the U.S. economy, with resilient consumer spending supporting a fourth consecutive year of above-trend growth. Looking to 2025, policy uncertainty is casting a fog on the economic outlook. That said, none of the proposed policies appear to spell trouble for the economy, at least in the short run and 2025 should be another year of expansion, likely at a trend-like pace, for the U.S. economy.
Stable unemployment and wage growth should contribute to lower inflation
Even as nominal growth slows, earnings are expected to rise with greater breadth
In the absence of major policy changes, inflation could continue its slow slide to 2%
Higher tariffs threaten to stall further progress on disinflation
Geopolitical tensions and supply chain snarls induced by COVID-19 have prompted a re-evaluation of open trade policies, and tariffs sit at the center of the Trump administration’s policy agenda. Beyond discouraging imports, tariffs can have negative unintended consequences. If passed, aggressive tariffs could lead to higher inflation and retaliation from other countries, adding further uncertainty to an already foggy economic outlook.
Stricter immigration policies could put upward pressure on wage growth
In a world of easier fiscal policy, higher deficits and inflationary pressures are likely
Resilient economic activity and policy uncertainty could slow the pace of rate cuts
With inflation trending lower and the labor market softening, the Federal Reserve cut interest rates by 100 basis points in 2024. In 2025, the committee will have a preference to continue easing policy until it reaches a neutral stance. However, resilient economic activity and inflationary policies, if passed, could make this difficult to achieve. A more gradual policy easing path is likely, limiting any downside move in rates. That said, until we gain more clarity on President-elect Trump’s policy agenda, the pace of rate cuts will continue to hinge on the incoming economic data.
Even with corporate credit spreads near all-time tights, all-in yields look attractive
Active management can help uncover opportunities veiled by rich index-level valuations
When allocating abroad, investors should focus on the structural tailwinds rather than the cyclical challenges
As U.S. stocks have enjoyed an extended run of stellar performance, international stocks have long been the underdog. However, the U.S. now also makes up over 65% of global equity indices versus just 25% of global GDP, suggesting that U.S. stocks are relatively expensive, and it might be wise for investors to consider diversifying into other global markets. While many international markets are facing cyclical challenges, structural tailwinds should continue to drive strong performance in select regions, creating plenty of opportunities for active managers.